Mill River financing a 'shell game'

Published 6:12 pm, Thursday, January 22, 2015

Wonder why Stamford expects a $1.5 million deficit this year? Here's an example.

Arthur Selkowitz's ad hominem attack on Mary Uva regarding Mill River financing (letter, "Uva's claims false," Nov. 12, which was remarkable only for its dearth of supportable facts, exemplifies the point. Mr. Selkowitz suggests that The Advocate check assertions before printing them, a process that might tellingly be applied to Mr. Selkowitz's own words.

So here are a few assertions to check. See the Limited Offering Memorandum of Oct. 19, 2011, City of Stamford, CT $16,245,000 Special Obligation Bonds, Series 2011A (LOM), and the Memorandum to Fred Flynn, Director of Administration, from Peter Privitera, OPM Director, Oct. 13, 2011 re Mill River TIF Financing -- Update (MEM). The "Special Obligation Bonds" are TIF (Tax Increment Financing) bonds, in which only the increases in taxes resulting from a project in a defined district can be used to pay the interest and premium on the bonds that finance the project. The city has no further obligation to pay. "General Obligation" (GO) bonds, the usual way to finance government, are paid by city taxes and fully backed by the city. Since the risk in buying TIF bonds is much greater than GO bonds the interest rate is much higher, in this case 7.125 percent, tax free.

The city and Mr. Selkowitz's organization have been asserting that the new park would increase the value of the defined district, which included a new business, RBS, which had nothing to do with the park. But in the LOM (pages 23, 30) the assessed value of property in the district was projected to increase by only 0.25 percent per year from 2012 into the foreseeable future. By 2041 the projected value, not including RBS, would be 7 percent less than it had been in 2009. In other words, they never really could affirm that building the park would have any positive economic impact on the district at all.

Since no increase in property values, hence tax base, was expected in the district, the bonds were to be secured by assuming (LOM, page 30) a 2.25 percent annual rise in the mill rate (i.e. a growth of government nine times the projected growth of the city), by including RBS in the TIF district, by choosing a base year (2004) before the building of RBS and by inflation. Ordinary folks might think this to be fraud but four members of the Board of Finance called it "brilliant and artful."

Another Malloy shell game, with RBS the centerpiece, expected to account for more than 42 percent of the tax increment, because the value of RBS in 2004 was zero. They held off issuing TIF bonds but in the meantime loaned the Mill River Collaborative $5.9 million without authorization (MEM page one). Then Malloy, Barnes, et al, went on to Hartford and soon gave RBS an 80 percent tax break. Goodbye centerpiece. The result was the TIF bond issuance of 2011, which included these features:

The bonds were for $16.245 million, to pay for construction costs of $11.4 million (LOM page 17). It was a private placement with local investors (MEM page 3) and was sold at a 1.5 percent discount (LOM page 17). $2.6 million of the bonds was to pay back Stamford for part of the $5.9 million loan (LOM page 17). For 10 years the bonds were for interest-only payment and weren't callable.

A total of $1.625 million of the bonds was for a Debt Service Reserve Fund (LOM p.iv) in case the tax increment was insufficient (essentially borrowing money to pay the interest on the money borrowed). In addition, the city made a $2.8 million initial deposit in a Surplus Fund, to be used to pay debt service in case the Debt Service Reserve Fund was insufficient. Excess district tax revenue, if any, would also go into the Surplus Fund (LOM p.iv), making those funds unavailable for other use by the city. Of course Mr. Selkowitz can say they can pay the interest, because 3.5 years interest was included in the package!

Tax revenue was projected to be insufficient to pay the interest as long as RBS had a tax break (LOM, page 31). The initial deposit to the Surplus Fund more than wiped out the $2.6 million "paid back" to the city and brought the amount "loaned" to the project to $6.1 million, except that $2.6 million of it was shifted from low interest rate GO bonds to high rate TIF bonds.

So up to that point (call it Chapter 1), the city was paying interest on unauthorized $3.5 million GO bonds, plus the Mill River District was paying $1.16 million annual interest for $11.4 million in construction costs (effective interest rate 10.15 percent).

Chapter 2: New GO bonds. It was always assumed that the 20 year TIF bonds could be refinanced after becoming callable in 2021, but why do it now? The new GO bonds borrow sufficient money up front to set aside to pay for the TIF bonds for the next seven years! The GO bond interest is added to the TIF bond interest for seven years. All the risk is shifted from the investors, who are being paid handsomely for taking a high risk (LOM, p.vii), to the Stamford taxpayers, whose lack of risk was the reason for the TIF bonds in the first place. The Mill River Collaborative is protected from potential default. More TIF bonds might now be issued, which certainly wouldn't otherwise be possible. Incredibly, the bonds were issued one month before RBS's tax break was due to expire (LOM page 20), after which TIF revenues were to increase to sufficient levels to pay the interest! It sure is a mystery.

So the local (connected?) investors bought what became no risk bonds at a discount, with principal and 10 years interest sitting in a bank waiting to be doled out to them. They will save up to 34 percent state and federal taxes on the interest, bringing the effective annual return to 11 percent, guaranteed over 10 years. Wouldn't you like to know just who these local investors are?

Three years ago the TIF bonds were said to be brilliant and artful. Now they are said to have been stupid and wasteful, so they must be paid by the taxpayer, a trick that excessively rewards the original investors but serves no other useful purpose. Now wait for Chapter 3.